Omnibus II delays full benefits of Solvency II but buys time for smaller insurers

Fitch Ratings says that the lengthy transition to the new Solvency II regulatory regime for European insurers, signalled by the European Commission’s Omnibus II Directive, will delay the full benefits of Solvency II. However, the transition measures will smooth the changeover from the current Solvency I regime, giving insurers more time to adapt to the new rules. Fitch maintains its view that while there will be winners and losers, Solvency II will be broadly ratings-neutral in aggregate across its portfolio of rated European insurers.

The harmonised risk-based Solvency II regime will ultimately bring many benefits to European insurance markets, including better risk management for insurers and greater transparency for investors. With Solvency II now unlikely to take full effect until 2023, Fitch expects a long delay before these benefits are fully realised. However, Omnibus II is ratings-positive for smaller insurers and niche players that might have struggled to meet Solvency II without a transition period during which to adapt.

Fitch believes that the transition period signalled by Omnibus II will reduce the risk of disruption to financial markets. “In the absence of a transition period, Solvency II might have triggered a sudden reallocation of insurers’ corporate debt portfolios into shorter-duration or more highly rated corporate and sovereign debt, because these attract lower capital charges under Solvency II,” says Clara Hughes, Director in Fitch’s Insurance team. “With European insurers holding more than EUR3trn of debt, a sudden mass reallocation of debt portfolios could seriously disrupt financial markets but the transition period now expected will smooth the impact.”

The special report “Omnibus II Signals Lengthy Transition to Solvency II” is available at Fitch Ratings web site..com.